Accounts payable is amongst the largest disbursement related functions after payroll. This function is also characterized by processes which are transaction intensive in nature and are more often than not carried out in a manual manner, leading to inefficient tracking and errors related to accounts payable processing. This invariably leads to loss of productive time and also increases the operational costs as discussed earlier.
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In the part 1 of this 2 part series, we will look into the list of common issues and errors related to accounts payable processing that are found in most organizations.
- Entry errors: Data entry errors account for most of the errors in accounts payable processing. According to a research report, data entry errors average 1.6% of the total AP transactions.
- Matching errors: Matching of invoices to purchase orders and goods receipts/packing slips is complex and prone to errors as business rules for matching are frequently not documented or followed by Accounts Payable staff.
- Improper account coding: Account coding is judgmental and rules for coding are not well documented or otherwise established in most companies; this may lead to inconsistent coding across departments or manipulation for budgetary or for other purposes.
- Duplicate or incorrect invoices: Vendors frequently generate duplicate invoices when an invoice has not been paid in a timely manner. Most companies can only track such invoices if a proper matching of invoices with POs is done.
- Disappearing invoices and unapproved invoices: Invoices that come directly from the vendor to a business unit manager or location other than accounting tend to get delayed (sometimes on purpose) or lost due to the unorganized paper work or filing systems, decentralized operations and multiple touch points for invoices.
- Approval of new vendors or Update of key vendor information: Careful controls should be placed on who can approve the establishment or revision of vendors to prevent fraud.
- Difficult to find invoices and cheques after processing and document storage is expensive affair: Documents are difficult to locate after accounts payable processing due to filling errors and are expensive to store and locate. Many companies store the invoice, a copy of the cheque and purchase order together for ease of retrieval, but this is extremely expensive. The lack of a proper electronic document management system also exacerbates the problem.
These issues in the accounts payable process also have critical business impacts which are as follows:
- No cash discounts (on early payment) & loss of volume rebates from suppliers
- Multiple payments for the same invoice resulting poor reporting of vendor spend
- Extra flab in the accounts payable department (extra clerks to handle the manual process)
Although the above impacts are critical to an organization, they offer potential benefits to the organization if their causes can be resolved. In part 2 of our series we will look as to how Supplier Information Management can help address some of the issues having critical business impact to organizations.